Regulator Tightens Oversight as Loan Quality Review Finds Weaknesses in Major Banks

Kathmandu — A recent loan quality review conducted by Bangladeshi consulting firm Houladar Yunus & Company has revealed weaknesses in credit classification and risk management practices among Nepal’s major commercial banks. The assessment found that several banks have failed to fully comply with regulatory standards, prompting the central bank to prepare stricter supervisory measures.

According to Nepal Rastra Bank (NRB), banks that do not improve the classification of their loans into categories such as performing, watchlist, substandard, doubtful, and bad loans may be instructed to increase their provisioning. The central bank has stated that further action will be taken only after seeking clarifications from the concerned institutions.

The loan portfolio review shows that the average non-performing loan (NPL) ratio among the tested banks stands at 7.70 percent, with two banks recording NPL levels above 10 percent. The assessment covered ten major commercial banks, including Global IME, Nabil, Nepal Investment Mega, Rastriya Banijya, Kumari, Laxmi Sunrise, Prabhu, Himalayan, NMB, and NIC Asia.

The report highlights that some banks have extended additional loans to large projects in order to classify them as “performing,” despite insufficient physical progress and weak supporting documentation. This practice has raised concerns that fresh loans may have been issued primarily to help borrowers repay earlier obligations. In several cases, proper site inspections, progress reports, and monitoring records were found to be missing.

Under NRB guidelines, loans overdue for up to one month must be placed under “watchlist,” up to six months as “substandard,” six months to one year as “doubtful,” and beyond one year as “bad loans.” Based on this classification, banks are required to maintain provisions of 1 percent for performing loans, 5 percent for watchlist loans, 25 percent for substandard, 50 percent for doubtful, and 100 percent for bad loans.

However, the quality review indicates that some banks have not fully complied with these rules. Regulators believe this has allowed certain institutions to present a stronger financial position than their actual risk exposure justifies, raising concerns about transparency and long-term stability.

The loan quality assessment was conducted as part of conditions set by the International Monetary Fund (IMF) before providing Nepal with Extended Credit Facility support. The IMF had emphasized the need to ensure the soundness of major banks. In response, NRB has announced plans to prepare and implement a roadmap to address identified weaknesses.

Meanwhile, financial data shows that non-performing loans in Nepal’s banking sector continue to rise. By the second quarter of the current fiscal year 2082/83, the average NPL ratio of commercial banks had reached 5.08 percent, up from 4.49 percent in the same period last year, based on unaudited financial statements.

Among the major banks, Himalayan Bank recorded an NPL ratio of 7.98 percent, Prabhu Bank 7.94 percent, NIC Asia 7.47 percent, and Nepal Investment Mega 7.90 percent. Several other banks have also reported NPL levels exceeding 5 percent, reflecting growing stress in loan portfolios.

At the same time, eight banks have managed to reduce their NPL ratios. Siddhartha Bank recorded the largest decline of 1.05 percentage points, followed by Nepal SBI, Nabil, Rastriya Banijya, Machhapuchchhre, Agricultural Development Bank, Laxmi Sunrise, and Kumari Bank. Everest Bank maintained the lowest NPL ratio at 0.68 percent.

Rising bad loans are putting pressure on banks’ capital adequacy and profitability. Higher provisioning requirements reduce earnings and limit banks’ ability to expand lending, potentially slowing overall economic activity. Regulators warn that continued deterioration in asset quality could weaken confidence in the financial system.

Analysts attribute the increase in non-performing loans to several factors, including loose monetary policy after the COVID-19 pandemic, heavy exposure to real estate and stock markets, unhealthy competition among banks, weak credit monitoring, and sluggish economic growth.

Experts stress that timely structural reforms, stronger recovery mechanisms, stricter supervision, and legal improvements are essential to contain risks. Without decisive action, they warn, prolonged weaknesses in credit management could pose long-term challenges to Nepal’s banking sector and broader economy.